2024/2025 Backdoor Roth Questions

[mbtn]

I currently do not have any type of IRA account (just a Roth 401k from my employer). My income is too high to directly contribute to a Roth IRA or to deduct contributions to a traditional IRA. So, I am considering doing a backdoor Roth.

I found the article from TurboTax about how to properly enter this on my tax return, but I was wondering a couple of things...

1) Are there any significant issues or risks I need to watch out for?

2) Can I contribute and to the Roth conversion in December for the 2024 tax year and then do another contribution and conversion in January for the 2025 tax year? That way I can get more money in to take advantage of growth opportunities or is there some time frame I have to wait between the two conversions?

[Opus 17 · Accepted solution]

Yes, you can contribute to a traditional IRA, not take the tax deduction (because you choose not to or because you are income limited) and then convert the traditional IRA to a Roth IRA.  The only risk/caveat is that you will get a form 8606 to document the transaction, and you should keep those forms 8606s until you retire, rather than throwing them out after 3 or 6 years.

There is no particular time requirement to do the conversion.  If you make a traditional IRA contribution for 2024 in 2024, and then make another traditional IRA contribution in 2025 for 2025, and wait to do the conversion until both contributions have been made, that's fine.  Or you can contribute, then convert right away, then contribute again, and convert right away.  It doesn't really matter.

The only difference is that any growth that happens in the traditional IRA will be taxable when you convert it.  For example, if you contribute $7000 in December, and $7000 in January, and you have $14,200 to convert in February, the $200 is taxable income (because it was growing tax free, it has to be taxed when it is converted to the Roth).  For this reason, most people do the transfer right away, and hold the money in a cash account for the couple of days it takes to work through the system.  (By contrast, if you contribute $7000 on December 15, convert it on December 16, then contribute $7000 on January 5, and convert it on January 6--then when you have $14,200 in February, that will be tax-free growth because it's in the Roth already.)

[mbtn]

Thanks for the detailed response. I had read about paying the tax on any earnings. I mostly didn't have clarity of whether there would be an issue with doing the pair of contribution/conversions that close together. 

Good thing to know about the 8606 forms.

[Opus 17]

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@mbtn wrote:

Thanks for the detailed response. I had read about paying the tax on any earnings. I mostly didn't have clarity of whether there would be an issue with doing the pair of contribution/conversions that close together. 

Good thing to know about the 8606 forms.

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No rules about closeness, although it may take a couple of days for each transaction to be processed by the broker.  That's something you will watch for with them.  

Something to be aware of with timing is that contributions can be retroactive, but conversions happen when they happen.  So if you contributed $7000 on January 2, 2025, designated for 2024, and you converted it on January 3, and you contributed another $7000 on January 7, designated for 2025, and converted it on January 8, your 2024 tax return would only show a contribution; and your 2025 tax return would show a contribution of $7000 and a conversion of $14,000.  This is perfectly ok, as long as you filed the 2024 return correctly with form 8606.

Otherwise, your tax return filed in 2025 will combine everything that happened between 1/1/24 and 12/31/24, and so on for 2025, 2026, etc. 

[gsh890123]

Hello, I am in a similar situation. I contributed $7K in December to traditional IRA but my brokerage says that the funds will not be available to transfer into Roth IRA until Jan 9.  It looks like it will earn an interest for that duration. My questions then are 1) can I still make this as a 2024 backdoor contribution to Roth in Jan? 2) Since the funds in my traditional IRA is going to earn interest, will this prevent me from transferring to Roth IRA? How would I report my 2024 taxes? 

[Opus 17]

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@gsh890123 wrote:

Hello, I am in a similar situation. I contributed $7K in December to traditional IRA but my brokerage says that the funds will not be available to transfer into Roth IRA until Jan 9.  It looks like it will earn an interest for that duration. My questions then are 1) can I still make this as a 2024 backdoor contribution to Roth in Jan? 2) Since the funds in my traditional IRA is going to earn interest, will this prevent me from transferring to Roth IRA? How would I report my 2024 taxes? 

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Conversions are not retroactive.

For 2024, the only thing to report is a non-deductible contribution to a traditional IRA.  This will be recorded on form 8606 as part of your tax return.

On January 9, you convert the entire amount.  Let's say it is $7020 with interest.  On your 2025 tax return, to be filed in 2026, you report a conversion of $7020.  Because you have a non-deductible basis of $7000, you only pay income tax on the $20 of tax-free earnings.  

Of course, this assumes you have no other balances in any traditional IRA.

You can do this again in 2025.  Suppose you contribute another $7000 for 2025 on June 1, and you have to wait for June 15 to convert it, at which time it is worth $7020.  Then, on your 2025 tax return you would report a $7000 non-deductible contribution and a total conversion of $14,040.  With $14,000 of non-deductible basis, only the $40 of tax-free earnings during the waiting period is now taxable when it goes into the Roth.